The Investment Function Reflects a Negative Relationship Between the Quantity

question 37

Multiple Choice

The investment function reflects a negative relationship between the quantity of investment and the interest rate because

• A) high interest rates make the borrowing that some require to finance investment too expensive relative to the potential return.
• B) high interest rates make the opportunity cost of foregoing an interest rate return on funds in lieu of financing an investment too high.
• C) low interest rates mean that more investment projects are available that pay the superior returns financiers are looking for.
• D) all of the above.
• E) none of the above.

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Definitions:

Opportunity Cost

Opportunity cost is the value of the next best alternative forgone as the result of making a decision.

Henry George

A 19th-century economist known for his belief that people should own the value they produce themselves, but that land and natural resources should belong to all (Georgism).

Allocative Efficiency

A state of resource allocation in which it is impossible to make any one individual better off without making at least one individual worse off.

Incentive Function

The role of rewards or penalties in motivating individuals or entities to behave in certain ways.